I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

Finding Little Evidence Of Foreclosure Fraud, Feds Give Up

Over at the Huffington Post they’re still talking about “rampant foreclosure fraud.” But I was always skeptical of claims banks were stealing houses from innocent homeowners. One big problem with that theory: Banks lose money on virtually every house they take back in foreclosure. And now the federal government seems to agree.

With a pair of terse notices yesterday, the Office of the Comptroller of the Currency basically admitted that its elaborate process for turning up evidence of fraud in hundreds of thousands of loan files was a waste of money.

With the $8.5 billion settlement with Bank of America, Citi and other lenders, the government abandoned the Independent Foreclosure Review and switched to a system of direct grants to foreclosed borrowers, details to come. In a statement, Comptroller of the Currency Thomas J. Curry said “it has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers.”

The New York Times reported today concerns grew “in the upper echelons of the comptroller’s office” at the cost of the loan reviews, which consumed up to 20 hours per file at $250 an hour. Banks spent $1.5 billion on this snipe hunt without turning up meaningful examples of fraud, the Times reports. That money could have been handed out to borrowers in the form of a $5,000 check for each file.

The outcome shouldn’t come as a surprise. After I wrote a piece critical of the parallel mortgage settlement with state attorneys general last year, comparing it to the deeply flawed tobacco settlement, I was barraged with comments from critics accusing me of downplaying foreclosure fraud. I responded with one simple question: Has there been a single case in the past five years of a homeowner who was current on his mortgage being foreclosed through fraud? Silence. I did get a lot of legal gobbledygook from marginally competent lawyers who, as it turns out, were the real crooks in the foreclosure crisis. For excessive fees, they offered underwater borrowers the false hope they could somehow keep their homes without paying for them, either by challenging the foreclosure paperwork or convincing a judge that the national registry system known as MERS was not the legitimate party to foreclose. Those tactics mostly failed. The Federal Trade Commission has a website devoted to protecting borrowers from the real scammers in the foreclosure crisis, and prosecutors have found plenty of fraud. Last September North Carolina AG Roy Cooper, for example, sued three foreclosure assistance firms for charging upfront fees and delivering nothing in return.

The reality is robosigning couldn’t have been the cause of foreclosure fraud because robots can’t engage in the self-interested behavior that underlies fraud. Robosigning was just an acknowledgement that in a large, modern lending institution only the central computer registry of mortgages contains all the information about loans, and no lawyer at the periphery can possibly possess additional information beyond what is in that registry. It may be nice to conjure up the image of a kindly loan officer, familiar with the circumstances of every person behind every home mortgage, but that’s not how the system works in big banks.

The OCC released an interim report on the Independent Foreclosure Review program last June, detailing the agency’s ambitious plans for getting to the bottom of foreclosure fraud. It sent out letters to 4.4 million borrowers, ran ads in 1,400 publications including Parade, People magazine, and USA Weekend, as well as Hispanic and African-American publications, and racked up an estimated 341 million impressions. Nearly 200,000 people submitted their files for review and regulators selected another 142,817 files for “look-back” reviews.

But by retreating to a class-action style payout system, where borrowers simply receive lump sums, the feds seem to be acknowledging that there wasn’t much outright fraud — as in banks stealing houses from innocent borrowers — to find.

Fraud is a flexible term, of course, and many lawyers think it includes lending money to people who have no hope of paying it back. This so-called “predatory lending” doesn’t make any economic sense, unless you’re willing to buy the theory that the fees flowing from an ultimately unprofitable loan were enough to induce bankers to destroy their own institutions in search of a year-end bonus. That’s possible, but it downplays the responsibility of the borrowers who signed detailed loan documents, filled with caveats and cooling-off periods mandated by federal regulators.

As for robosigning computers stealing homes, still not much evidence for that. If you know of a case, do let me know.

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True, all, anon- especially the throw up part. Good for you, following through and forcing the law- it takes a whole lot of strength, but people like you are what keep the banks with red wrists (which is better than nothing). They can’t stay out of court, which isn’t enough, but it’s something- hopefully, as more people start to understand, and the truth is accepted, we’ll get back to sane banking instead of this vomit inducing nightmare.

Here’s one the AARP called out but there’s plenty more: just requires using Google for a minute. http://www.aarp.org/money/credit-loans-debt/info-10-2011/early-payment-sets-off-foreclosure-outrage.html

People current don’t lose their homes though: instead they’re drug through the system for awhile until the system catches up. The one’s I’ve heard of where they lost their homes are usually active-duty soldiers who put their mortgages on auto-pay, went to fight in Iraq or Afghanistan, then the bank illegally changed the payment amount and took the home when they had no idea what happened. In all fairness the banks eventually made them whole — either bought their house back or bought them a similar one if the first had been sold to somebody who wouldn’t sell it back, and gave it to them for free, plus about $110K — but only after the federal government intervened.

Still, like I said, the reason an enormous number of people are not current is that the banks told them to stop paying to qualify for a modification. Once they stop they can’t start again. That’s well documented: the banks have pointed it out as a source of frustration. In fairness to them they arguably had no choice except to say that sometimes or they’d violate investor terms by modifying a current loan, though the federal government changed the law to allow them to do that without accruing liability.

You eventually saw Lay was part of the problem, but it took awhile. Two months after that piece, almost to the day, Enron was finished. You should dig in deeper and see the foreclosure mills and their fraud is very real. It’s an interesting intersection from what you write about because virtually all the fraud are contracted bank lawyers — typically low paid really bad lawyers — and I’m not sure that the banks entirely realize what their attorney’s are up to. They know they’re taking houses but I suspect when genuine GC’s intervene and take a look they’re appalled. Little birds have told me that given it’s their bank, their brand, and they’re paying the bills for honest work which isn’t being done correctly they may even than those who oppose foreclosures, albeit a lot more quietly.

Mr. Fisher, If you feel there was limited Fraud from the Banks, I offer to send to you my case that was sent to the IFR but now will not be addressed. Feel free to dig deep in my case and check and reconfirm all of my allegations. Then we can have a good healthy discussion on fraud. Oh Yes, make sure you listen closely to the audio recordings of the Bank of American reps.

Oh my goodness. Do your field research before publishing your superficial article. There are many homeowners who are losing their home. Some of them are not on current for payment as you say, but some of them are current or just missed payment one or two times. Some companies use tactic techniques not to receive payment or would not talk to borrowers. It happened to us. We were just late for a few days. They told us to send a money order with excessive late fee and handling fee, so we did. But they sent the money order back. We have tried everything but they didn’t accept money. And a few months later, we received a letter from their lawyer. We did not anything wrong, so immediately hired a lawyer. It is a long story, so I am not going to mention that here. At the end we lost our house even though we didn’t sign ANY documents. The entire system is corrupt. We have to deal with financial strain, lawyers who are not doing their job, and most importantly, securing children stable life.

This is really happening here in the US. Do your research first before publishing any articles at large. Be responsible.

” Has there been a single case in the past five years of a homeowner who was current on his mortgage being foreclosed through fraud? ”

I find that an irrelevant question. Not being current initiates the process of foreclosure. The foreclosure process rule of law is the question. Deceptive practices doesn’t surround solely on whether the payments were current.

” This so-called “predatory lending” doesn’t make any economic sense, unless you’re willing to buy the theory that the fees flowing from an ultimately unprofitable loan were enough to induce bankers to destroy their own institutions in search of a year-end bonus. ”

The so-called theory on predatory lending can be found over at the Library of Congress Online Catalog. Dates back to 1999, as far as I can see.

Aaaaand combine “loan documents, filled with caveats” with a way to bundle loans up, transfer them to a “bankruptcy remote entity” so that the bank no longer owns them. Then have that entity issue a cirtificate, backed by those bundled loans or something similar, that goes back to a trust owned and operated by the bank. Then use the backing of that certificate to issue notes, bonds or whatever the bank wants wants to call it, then sell those notes, bonds or whatever to investors. Bam! The bank is paid for the loans, the risk is transferred to investors and the banks make money off of fees, which means volume, rather than quality, equals money.

Lent so much money to creditworthy people that you now have to turn to people who are not creditworthy? No problem! Traunch the securities and tell the people in the bottom traunches that they are takiing a high risk for the chance of high returns, tell the people in the top traunches that you’ll make more traunches to protect them if it becomes necessary, and start lending to people who can’t pay the loans back. (This is sadly how it actually works, or at least has worked. Things are changing, and nobody really knows how.)

You’re assuming that banks don’t break the law. (If you want a glaring example of a bank breaking the law in plain view, just look at the Citicorp-Travlers merger.) If there’s money to be made and they think they’ll get away with it, they’ll break the law. It’s a mirical when regulators act and too few people actually invoke private remedies when they could. On top of that, it is assumed that people who put their name on an agreement actually understand that agreement, and it takes a colossal effort to prove otherwise.